Reforms to Expand Foreign Participation in G-Secs

📌 Summary:

• The Government introduced reforms to raise Foreign Portfolio Investor (FPI) participation in Government Securities (G-Secs) and deepen the bond market

• Key measures: tax exemption on interest income and on capital gains (LTCG/STCG) from G-Secs for FPIs/FIIs (income arising on/after 1 April 2026, via the Income-tax (Amendment) Ordinance, 2026); expansion of securities under the Fully Accessible Route (FAR); and streamlined investment norms

• Earlier regime taxed FIIs/FPIs at 20% on interest, 30% on STCG and 12.5% on LTCG from G-Secs

• As on 12 May 2026, FPIs held G-Secs worth Rs 3,75,171 crore (3.34% of Rs 112.42 lakh crore outstanding); FAR held Rs 3.21 lakh crore (6.74% of Rs 47.63 lakh crore FAR-eligible stock)

• Expected benefits: stable long-term capital (pension/insurance/sovereign wealth funds), better liquidity and price discovery, a smoother yield curve, lower government borrowing costs, stronger monetary-policy transmission, and funding for infrastructure, manufacturing, urban development and climate priorities

🎯 UPSC Relevance: GS3 Economy — capital markets, foreign investment, government borrowing and bond-market deepening reforms.

📝 Prelims Facts:

• G-Secs are tradeable debt instruments issued by the central/state governments to fund public projects and manage fiscal deficits

• The Fully Accessible Route (FAR) allows non-residents to invest in specified G-Secs without ceilings, unlike the restricted General Route; FII is a category of FPI (passive investment); BIS is owned by central banks

🔑 Key Term: Fully Accessible Route (FAR) — an RBI channel permitting non-residents to invest in specified Government Securities without investment ceilings or holding-period restrictions.